Priceline to Acquire Kayak: Unexpected, Yet Undeniably Brilliant

Published November 2012

Carroll Rheem

It's not often that the travel industry gets a true bombshell. Along with the many accomplishments the management teams at Priceline and Kayak can count, catching us all off guard is now one of them. But as unexpected as Priceline's announcement of intent to purchase Kayak was on November 8, the tremendous potential of this collaboration is obvious. The move is not without risks, of course, but it is, quite simply, brilliant.

Just what the doctor ordered for KayakKayak has grown to be a pretty big fish in a pretty big pond. As market leader of the metasearch arena in the U.S., it has proven its proposition against the likes of Google and successfully launched an IPO, which valued the company at US$1 billion. But apparently that was just a warm-up. Not even four months later, the valuation has nearly doubled with Priceline's announcement of its intent to acquire the company at a valuation of $1.8 billion.

There is no ambiguity about what Kayak must do now to create value for its shareholders and justify its price. The company needs to venture beyond its pond and transform itself from a U.S. brand into a global leader, and time is of the essence. Kayak has struggled for years to replicate its success in other markets, while other players have been establishing formidable competitive brands around the world. This scenario is practically deje vu of what the big four U.S. OTAs went through roughly seven years ago. Only one, of course, managed to break through the international barrier with phenomenal success – Priceline.

Given its track record, there is no way Kayak could build major international operations without a serious injection of capital and talent. Its strengths lie in great technology and the ability to provide relevant search results that keep consumers loyal and advertisers satisfied. This core platform – as valuable as it is – means nothing, however, without advertiser partnerships and effective consumer marketing. Speed to market is critical for Kayak at this juncture. Europe in particular is poised for major pop in metasearch in the next few years: Fragmentation has driven European travelers to use more websites on average than U.S. travelers1, creating an ideal environment for aggregation. Europe will therefore eventually represent a larger (probably much larger) market than the U.S. – and Asia Pacific is not far behind. But supplier and OTA fragmentation – the very thing that makes metasearch such a powerful proposition outside the U.S. – is like tar on a racetrack. Expanding breadth of partners and scaling operations is something Priceline has proven it can do extremely well and extremely quickly – there is a great deal of unique knowledge and support it can provide.

The international marketing element is, of course, the other critical element Kayak needs to master to dominate global metasearch. Priceline's brands certainly have not achieved their astronomical growth without best-in-class marketing practices. However, it's no secret that Booking.com's unmatchable pace has been fueled by aggressive search marketing. With the large margins characteristic of the hotel OTA space, Priceline can afford to buy all the traffic it wants. Metasearch, on the other hand, collects and operates on fundamentally narrower margins (due to a referral versus transactional model). While Kayak would benefit tremendously from Priceline's experience and capabilities on the marketing side, there cannot be a simple transfer of practices.

International expansion may be at the heart of why the acquisition makes sense – but there are also other key elements involved. Regardless of geography, Kayak has focused on shifting its mix away from air and toward hotel, Priceline's primary product. Priceline itself went from being U.S.-based and air-centric to being truly global and hotel-centric. The company's experience during this transformation would no doubt help Kayak pivot successfully.

So what's in it for Priceline?The price tag associated with the planned acquisition of Kayak may seem high given its current financials. But it implies that Priceline believes (with good reason) that metasearch is just coming into its own. This acquisition is the perfect opportunity for Priceline to apply the competencies and competitive advantages it has developed around the world in a new, yet related, competitive arena. As hotel OTA growth inevitably cools off, Priceline will need a new area for expansion – and it certainly has the funds to do so. No other company has better raw materials to create a global powerhouse than Kayak.

While Kayak is currently the metasearch leader in the U.S., it is still a fledgling business in the global scheme of things. Priceline is plucking Kayak at the perfect stage of ripeness – a sapling poised for a rapid growth spurt. The acquisition will also help build new competencies in areas where Priceline has been average, if not weak – technology innovation (including mobile) and diversification into a nontransactional business model. Priceline has not even built the media elements (ad publishing) that other OTAs have.

Ultimately, no two online travel players could be this different – and this complementary. But the acquisition is neither about melding metasearch and OTA, nor going upstream in the consumer purchase funnel just to drive more to OTA assets. The real opportunity is in metasearch itself – and in taking Kayak's impressive business in the U.S. and multiplying it several times over in international markets. Someday, when the financial timing is right and/or the portfolio valuation isn't recognizing the full potential of its individual parts, Priceline may just spin it off again.

Recent Phocuswright News

The size of the German online travel market is impressive – and growing 8% annually. By 2020, online gross bookings will reach €34.2 billion, second only to the U.K.'s in Europe. A new Phocuswright report – German Online Travel Overview Twelfth Edition – provides data, analysis and insight into the...

Politics rarely figures into the discussion at The Phocuswright Conference. But at this year's event – which took place in Los Angeles just one week after the U.S. presidential election – politics and the implications of a Trump administration for travel and tourism came up frequently both on stage...

Latin America's populations are getting tech-savvier, leading to a boost in online bookings and Internet penetration. Looking forward, four in 10 sales will be made online in the region by 2020. Phocuswright's Latin America Online Travel Overview Third Edition features rich analysis of the Latin...